SECURE Act PassesWhat Does it Mean for Retirement Plans & IRAs?


The retirement industry saw plenty of changes in 2019.  The Department of Labor issued a final rule on association retirement plans and a proposed rule to establish an additional safe harbor for electronic delivery of notices and disclosures. The Internal Revenue Service issued final regulations on hardship distributions and a much-needed expansion of the Employee Plans Compliance Resolution System. The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE, was added as “Division O” to the Further Consolidated Appropriations Act, 2020 (FCAA). Many of the changes included in SECURE became effective on January 1, 2020.  

Pooled Employer Plans

Most of the provisions in SECURE are designed to increase both the overall number of plans and participation in existing plans.  To that end, SECURE creates a new type of plan, the Pooled Employer Plan (PEP).  PEPs allow unrelated employers to join a plan offered by a Pooled Plan Provider (PPP) who will shoulder most of the administrative and legal obligations. The PPP must be the named fiduciary for the plan and will be subject to increased bonding requirements.  Regardless of how many employers join the PEP, it is treated as a single plan for Form 5500 and plan audits.  The PEP provisions are effective for plan years beginning after December 31, 2020. More guidance on PEPs is expected before the effective date.

Retirement Plan Tax Credits for Small Employers

To further incentivize small employers to offer retirement plans to their employees, SECURE significantly increases the tax credit for new plans.  The tax credit is available to employers with no more than 100 employees receiving at least $5,000 in compensation and applies to certain expenses related to the establishment of a retirement plan and retirement-related employee education. Generally, an eligible employer is entitled to a tax credit equal to 50% of qualified startup costs. Before SECURE, this credit was limited to $500 per year for the first three years.  Under the new law, the credit is increased to the greater of $500 or $250 for each eligible non-highly compensated employee, not to exceed $5,000 per year for the first three years.  An additional $500 credit is available with an addition of an auto-enrollment feature.  Both tax credit provisions are effective for taxable years beginning after December 31, 2019.

Plan Adoption Date

Before SECURE, a plan sponsor had to adopt a plan no later than the last day of its tax year.  For taxable years beginning after December 31, 2019, a plan may be treated as adopted on the last day of the taxable year as long as it is adopted on or before the due date of the employer’s return for the taxable year.  Allowing employers to adopt a plan retroactively presents a great opportunity for advisors who are looking for additional deductions.

Safe Harbor 401(k) Changes

SECURE also makes some welcome changes to the safe harbor rules.  Under the old law, a safe harbor election had to be made and communicated to the employees prior to the beginning of the plan year.  Effective for plan years beginning after December 31, 2019, a safe harbor notice is only required if the plan uses a safe harbor match formula.  Additionally, a 401(k) plan may also be amended mid-year if a non-elective safe harbor contribution is utilized.  A 3% safe harbor can be adopted at any time before the 30th day before the close of the plan year, while a 4% safe harbor can be elected no later than the end of the following plan year. 

Expanded Eligibility for Some Long-Term Employees

SECURE includes a provision that will expand coverage to long term employees who have failed to meet eligibility.  This will significantly increase the number of part-time employees who are eligible to participate.  Generally, a plan can require employees to attain age 21 and have a year of service with at least 1,000 hours in order to be eligible to participate.  Under the new law, employees with three consecutive 12-month periods of at least 500 hours must be allowed to make elective contributions. While employers are not required to include these participants for employer contributions and testing, it appears that you would still need to count these employees for Form 5500 purposes.  This could be problematic for some employers who are close to the participant limit for the audit exemption.  This provision is effective for plan years beginning after December 31, 2020, and 12-month periods beginning before January 1, 2021, are not taken into account. Since plan years beginning after December 31, 2023, will be the first plan year to require the inclusion of these participants, regulatory guidance will likely provide clarification or relief on this issue. 

Penalty-Free Withdrawals for Expenses Related to Childbirth or Adoption

Distributions from a retirement plan or IRA must generally be included in income.  When that distribution takes place before age 59 ½, that income will also be subject to a 10% penalty unless an exception applies.  SECURE creates a new exception for certain expenses related to childbirth or adoption.  To qualify, the distribution must be taken within one year of the event and cannot exceed $5,000 per individual.  Unlike most distributions, a qualifying withdrawal can also be repaid to the plan or IRA.  It is also important to note that while SECURE provides for the exception to the 10% early withdrawal penalty and repayment, it does not require plans to provide the distribution option.  Whether to allow for this type of distribution is still a plan design issue, and an amendment will be needed for plans that will offer the distribution option to its participants.  The exception to the early withdrawal penalty will apply to distributions made after December 31, 2019.

Lifetime Income Disclosures 

The act creates a new required disclosure for defined contribution plans. Participants must now be provided with an annual statement that expresses his or her account balance as a lifetime income stream.  The annual disclosure will estimate the monthly benefit the current balance could provide if it was used to purchase a qualified joint and survivor annuity or a single life annuity. Since this information could vary greatly based on the format and assumptions, the Department of Labor will need to issue model disclosures and assumptions for plan sponsors to rely on. The requirement is effective for the first statement provided more than 12 months after the DOL issues its model disclosures and assumptions. 

Increase in Penalty for Failure to File Certain Returns

SECURE increases penalties for failure to file certain returns.  The penalty for failure to file Form 5500 increases from $25 per day with a maximum penalty of $15,000 to $250 per day with a maximum penalty of $150,000.  Failure to file Form 8955-SSA increases from $1 per participant per day, up to a maximum of $5,000, to $10 per participant per day, up to a maximum of $50,000.  Both increases are effective for required filings after December 31, 2019.

Saltmarsh provides a full range of administrative, consultative and advisory services for all types of defined contribution plans. Our team of retirement plan consultants are well-versed in all areas of plan administration, from compliance audits and accounting to governmental reporting and testing. Contact us if you have any questions about these new changes or would like to learn more about the services we offer for retirement plan administration.

About the Author | Jim Hallberg, J.D., ERPA, QPA, QKA
Jim is a manager in the Retirement Plan Administration Department of Saltmarsh, Cleaveland and Gund. He has over 10 years of experience working with clients to design and implement retirement plans to maximize benefits. Jim specializes in compliance and consulting services of qualified plans, including plan corrections under IRS and DOL compliance resolution programs. Prior to joining Saltmarsh, Jim served as a pension analyst for a regional firm where he helped manage 200 active plans.

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